Is Your Firm at Risk? New Restrictions on Outbound Investment

In August of 2023, US President Joe Biden signed an executive order (EO) establishing new outbound investment regulations targeting Chinese development of certain technologies deemed to be risks to US national security. 

The order gives the Department of the Treasury oversight into US investors seeking to fund Chinese firms involved in developing sensitive technologies, including semiconductors, artificial intelligence, and quantum computing. The initiation of this executive order has opened the path to more formal restrictions on outbound investment, including the potential creation of a new outbound investment regime in the United States. This follows a growing trend among Western countries looking to maintain advantages over geopolitical rivals by controlling or diverting investment flows from their jurisdictions, particularly into the tech and energy sectors. 

President Biden’s Executive Order 

President Biden’s executive order, signed on August 9, 2023, establishes regulations for certain types of investment into the development of artificial intelligence tools, quantum information technology, semiconductors, and other microelectronics in ‘countries of concern.’ Currently, the only country explicitly mentioned in the order is the People’s Republic of China (PRC) and the Chinese-administered regions of Hong Kong and Macau. The Biden administration has earmarked the development of these sectors by China and Chinese firms as an ‘extraordinary threat’ to US national security interests due to their ability to advance warfighting, intelligence, and cyber capabilities. 

Furthermore, this order mandates that US individuals provide notification of information regarding certain transactions with foreign entities/individuals covered under these interests. It also prohibits certain transactions involving ‘covered’ foreign persons outright.  While these restrictions currently only target investments into certain Chinese entities, these restrictions will likely grow to include other countries and jurisdictions deemed threatening to national security. 

These new restrictions give the Secretary of the Treasury jurisdiction to prohibit certain outbound investments and require notification for others to preserve US strategic advantages over geopolitical foes. Being amongst the first of its kind, this executive order was open for public comment after its initial announcement in August.  Formal regulations include specific definitions of industries and products deemed threats to US National Security and will likely evolve in the coming months and years. 

The Future of Outbound Investment Regulations 

As the US rolls out these new regulations about outbound investment, other US allies are likely to consider similar policies. For example, the UK and other European countries have also signaled concern over China’s development of sensitive technologies and have begun to consider regulations and outbound investment regimes following Biden’s executive order. 

Many European countries share national security concerns over China’s ability to develop sensitive technologies that may bolster their warfighting capabilities, especially concerning their relationship with Russia. Growing fears over humanitarian issues in China, such as its treatment of Uighur Muslims in Xinjiang Province, have also raised concerns over the destination of outbound investment. 

The US Congress has debated in both the House and Senate the future of outbound investment beyond those established by the executive order. Currently, there is no formalized regime for reviewing outbound investment as there is for inbound foreign investment. However, Congress will likely build on the current legislation, expand the manifestation of geopolitical risk screening in business practices, and establish a more formal review process for specific transactions. 

China is the only ‘risky jurisdiction’ defined by the executive order; however, as legislation around this issue grows, new jurisdictions, products, and industries will likely be targeted by outbound investment restrictions. 

What This Means for Investors 

Current geopolitical tensions threaten to polarize world powers further. War in Ukraine and China’s ambitions for territorial expansion and commercial dominance threaten the national security of the United States and its allies. Understanding this, the US and its allies have proposed and enacted sanctions and other regulations targeting individuals, companies, and industries worldwide, which threaten their capability to maintain military and economic superiority. 

Investors should understand that as geopolitical tensions continue to rise, overseas commercial and economic activities will be subject to heightened scrutiny from government institutions. This is especially pertinent to those heavily involved in the tech industry in artificial intelligence, cybersecurity, and semiconductors. Other sectors, such as (but not limited to) financial services, should also engage in heightened due diligence work to ensure they are ahead of and compliant with current and upcoming legislation about outbound investment. 

More profound economic implications of outbound investment controls may also hamper future investment opportunities, particularly in risky jurisdictions. Industries not directly affected by outbound investment regulations may have added difficulty operating in China and other potentially targeted regions. For example, geopolitical tensions between China and other countries have led to Chinese officials targeting foreign firms and executives in retaliation. This may continue to occur as they lose foreign investment in valued industries. 

Implications for De-Risking and Liability 

The Biden administration’s EO limiting investment in China is not confined to his tenure in office but is the latest development in how the federal government responds economically to geopolitical multipolarity.  Recent statements by Deputy Attorney General Lisa Monaco to the American Bar Association this past March, in conjunction with Biden’s EO, indicate the greater complexity and liability facing US companies seeking to invest abroad and adapt their supply chains.  

Traditional American business culture faces an increasing need to adapt and implement new training and due diligence practices to avoid rapidly emerging liability and regulatory restrictions due to geopolitical risk.  Companies can no longer look the other way. This is frequently emphasized at the Federal level, with significant implications for US companies operating abroad. 

            

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